China’s Financial Summit: The Leadership Meets Hard Reality

On Friday and Saturday July 14 and 15, Beijing will hold a key financial meeting, that is expected to be attended by President Xi Jinping. This may be China’s most import economic planning meeting in several years as it will be a test of Beijing’s ability to restrict credit to the economy. We remain skeptical.

The conference is being heralded as the cornerstone of China’s deleveraging policy. At bottom, though, the driving force is Xi Jinping is desperate to avoid any kind of financial upset ahead of the Party Conference this fall and has ordered the banks to curtail risk. But the system has yet to actually deleverage. Will this change?

Our conclusion is Beijing will successfully reduce certain kinds of highly visible, and risky credit, such as Wealth Management Products, but the fiscal and financial demands of China’s various political interests will prevent a significant restriction in overall credit. Thus, with continued credit flowing into unproductive areas, the chances of a sharp downturn in economic activity, coupled a “balance sheet recession,” remain high.